What the commercial real estate market can expect in 2009 – PART 3

More Distressed Property

This is the last part of our three part series on what you should expect in the commercial real estate market in 2009. More Distressed Properties are sitting out there, with more to come. According to CoStar, there are approximately 1,200 commercial real estate loans that are either behind on payments or past their maturity date without being refinanced.

In commercial real estate, most loans are 5 or 10 years and then the owner needs to refinance the loan. Some lenders are holding off any foreclosure process as long as the loan is being paid. A loan in good standing is better than foreclosing.

There are an additional 6,100 commercial loans that servicers have identified as a possible concern, which represents over $57.8 billion dollars. Will these loans go bad? I think a good portion will go bad before the credit markets loosen up. But, even if the credit markets loosen up, the value of some of these commercial properties, especially office and retail, have fallen in value so much that there isn’t enough equity for a new lender to fund the project. This means the loan may ultimately fall into default and become an REO.

Going Green
 

There is some-what of a bright spot for commercial real estate. Going green seems to be the theme for 2009. The world is going green (as it should) and commercial property with the proper green certifications continue to enjoy a premium in the marketplace in terms of higher occupancy levels, rental rates and sale prices compared with “non-green” properties.

Only about 1 in 15,000 buildings are LEED certified. This number will rise because there is a new federal mandate to take effect in 2010 to have federal agencies occupy office buildings that are certified green. CoStar recently did an analysis of 9.8 billion square feet of office space and found that buildings which are certified green, enjoyed a 3% to 6% higher occupancy rate than non-green buildings. The rents were as much as $18 per square foot more per year. These are just averages.

Owners are starting to recognize that green development can be a cost saver as well as a revenue booster to their properties. This is why many are starting to follow the changes the US Green Building Council has introduced in its LEED certification system. Developers have found that achieving a Gold LEED certification doesn’t cost much more to implement, plus the higher rents can compensate for the higher building costs. Tenant operating expenses are reduced in green buildings which reduces vacancies.

Some features you can expect in green buildings are:

• highly efficient lighting
• recycled aluminum, concrete and steel
• Lobby windows with sunscreen solar panels
• Restroom lights on sensors
• Atrium lights on timers

Could 2009 be the bottom in the housing market? Maybe, but I don’t think 2009 will be the bottom in the commercial real estate market. The worst is yet to come for commercial. We might have to wait until 2010 before we can start speculating on a bottom in commercial. When the news starts talking about all the commercial REOs and non-performing loans, then investors can start thinking about “bottom-fishing” for new commercial property to buy for their portfolios.

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